Question
Essence Corp. has a market value of debt-to-equity ratio of 1.5 (ie, market value of debt to market of equity ratio = 1.5). Its book
Essence Corp. has a market value of debt-to-equity ratio of 1.5 (ie, market value of debt to market of equity ratio = 1.5). Its book value of debt-to-equity ratio (book value of debt to book value of equity) is 0.5. The firms bond has a low credit rating with an annual coupon rate of 8%. The current yield to maturity of its bonds is 11%. The company has an equity beta of 1.1 and a debt beta of 0.4. Assume that the risk-free interest rate is 1% and expected market risk premium is 4%. Essence Corp. faces a tax rate of 21%. Suppose its management is considering a project that has the same risk and same financing mix as the firm. The cost of capital for the project is%
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